Transferring Property Before Bankruptcy

Can you or should you transfer property (or title to property) before filing bankruptcy? 

This is a very common question--and problem--in the bankruptcy world.   The concern is when the transfer is a "fraudulent transfer" under either state law or bankruptcy law.

In bankruptcy, pursuant to 11 U.S.C. §548 (section 548 of the Bankruptcy Code),  a fraudulent transfer is any transfer of any asset--or any interest in any asset (such as part ownership in a home)-- made within two (2) years prior to filing the bankruptcy case and in which either of the following are true:   A.  The transfer was made with actual intent to hinder, delay, or defraud any entity to which the debtor was or later became indebted to; OR  B.  the debtor received less than reasonably equivalent value for the exchange AND was insolvent on the date the transfer was made (or became insolvent as a result of the transfer).  There are actual several other bases for the transfer to be considered fraudulent, but these are the most common. 

An important thing to know about the above, is that the transfer discussed above can be either voluntary or involuntary.

Most states have their own versions of this fraudulent transfer law.  In California, the fraudulent transfer law is very similar and is set forth in Civil Code section 3439.04.  The statute of limitations is set forth under Civil Code section 3439.09. It is almost identical to the bankruptcy statute except that the lookback period is up to 7 years from the date of the transfer.   Thus, if you file bankruptcy in California, the Trustee can sue the transferee for any transfer that took place within 7 years prior to the filing of the bankruptcy case.   And, under California's general fraud statute (CCP 338) the lookback period is 3 years from the date the affected party discovers facts constituting the fraud.

What's the penalty?    A creditor (or, in bankruptcy, the Trustee)  can sue the recipient of the transfer for the value received on the date of the transfer and to void the transfer itself (i.e. recover title to the property). 

Additionally, if the act was intentionally done to hinder, delay or defraud one's creditors, a debtor's entire discharge can be denied as a result.  This is in addition to the Trustee or creditor recovering the transfer (or value thereof) from the recipient.

This is actually a very complex area of law, but the above should give readers a good understanding that it is RARELY advisable to transfer property for less than fair market value to anyone.  This includes putting your children on title for estate planning purposes and quitclaiming the house to them, etc.  There are other, correct ways to accomplish these things without exposing yourself and the transferees to liability. 

Free Hint: Seek the advice of a competent attorney BEFORE transferring any assets.